Stocks seem to have stabilized somewhat after the S&P posted two consecutive weeks of declines, and indeed our short-term technical forecast suggests the index might continue to hold key lows. Could this point to an Australian Dollar bounce? Maybe, but first we a key driver of Aussie weakness—speculative trades.

The chart below shows that Australian Dollar positioning is at its most extreme on record—futures speculators are extremely net-short, while commercial hedgers are at their most defensively long in history.

But nothing moves in a straight line, and positioning is far too one-sided in our opinion for the sell-off to continue. We’re likewise seeing signs of popular sentiment extremes as reputable newspapers use headlines such as “Australian Dollar plummets” to describe recent price action.

I can see the counterargument now—“but won’t Reserve Bank of Australia interest rate cuts and falling gold prices continue to hurt the Aussie?”

I’ll be the first to admit that it’s dangerous to try and buy into such sharp declines, and indeed our sentiment-based trading strategies have done well in selling into Australian Dollar weakness. In fact, our volatility-friendly Breakout2 system is currently short the Australian Dollar against the US Dollar, Japanese Yen, and Euro.